Reliance Communications’ QIP investors lose nearly 50%

[Editor: This report does not give the true picture of Reliance Communications Ltd (Rs.73.35). It says: "Besides, as R-Com’s quarterly results statements have shown, there’s hardly anything in its operational performance to get excited about". But the point is that the company  saw profit rise of 86% over the last year, as more subscribers use smartphones to surf the internet.The company said that the data traffic increased due to a boost in both subscribers and higher data usage per customer. Now, this is a big thing as "data-revolution" is going to gain more strength in the coming days. The Wall Street Journal wrote on 18 February, 2015: 

Most of India’s new smartphone users have never owned computers. They couldn’t afford a device that could give them Internet access until smartphone prices drifted below $200. Today, close to a quarter of all smartphones on sale in India cost less than $100, according to research firm Canalys. Cellular companies have been anticipating an explosion in data usage for years, but it wasn't until cheap smartphones appeared that the boom could begin. With smartphones in their pockets, more Indians are discovering the value of being online and they are increasingly willing to shell out more rupees every month for it.“Cheap smartphones are at the heart of the growth,” said Srini Gopalan, head of Airtel’s consumer business. “A year-and-a-half ago, there were 60 million smartphone users, now there are 120 million. This has led to the explosion in data growth.” After years of delays, India is scheduled to auction new bandwidth next month but it won’t come cheap. The starting price for each block of bandwidth in the March 4 auction is 37.05 billion rupees. The final price could hit two or three times that number, say company executives and analysts.

Remember, Data business is of high margin. Moreover,  regarding the entry of Mukesh Ambani’s Reliance Jio let me quote the Business Standard of June 17, 2014:

In what will extend the telecom alliance between the two brothers beyond infrastructure-sharing, Anil Ambani-promoted Reliance Communications (RCom) is tying up with Mukesh Ambani’s Reliance Jio for a pan-India intra-circle agreement, straddling the 800-MHz and 2,100-MHz bands. Currently, their alliance is restricted to sharing towers and fibre-optic network. Through the deal, to be signed in a few days, Reliance Jio, which faces challenges in the 2,300-MHz and 1,800-MHz spectrum bands (these don’t offer subscribers high-speed data indoors), can now address this issue by using RCom’s 800-MHz band. RCom has five MHz of 800-MHz spectrum in most circles across the country and currently, this spectrum is unused. After the spectrum is liberalised, it can be used for fourth generation (4G) long-term evolution (LTE) services, too.

Therefore, there is nothing much to be worried due to the entry of Reliance Jio. If Reliance Communications Ltd faces competition, so will Bharti Airtel, Idea Cellular and Vodafone India Ltd. Besides, the text says: 

'The reason for this is that the spectrum on offer is limited, and larger companies such as Bharti Airtel, Idea Cellular and Vodafone India Ltd may well use their financial muscle to buy better quality 900 megahertz spectrum, even in circles where they aren’t compelled to bid".

Now the point is that the Financial Muscle will only be used if these companies, find the deal to be beneficial. Buying spectrum at abnormal prices, might land telecom companies in a soup. Therefore, there is no need for such Utopian assumptions. 

This article then gives misinformation as it says: 
"R-Com, on the other hand, is laden with debt and doesn't have the luxury of some of its competitors while bidding in the auctions. After the QIP issue, net debt has reduced from around Rs.40,000 crore to Rs.36,767 crore". But, then Bharti Airtel’s net debt rose sharply last quarter to $10.55 billion. Reliance’s debt rose to $5.9 billion. Hence, saying only Reliance Communications Ltd is debt-ridden, while the others are not, is an Ostrich-like approach] 

February 18, 2015: Reliance Communications Ltd (R-Com) had struck when the iron was hot in mid-2014. It raised Rs.4,800 crore through a qualified institutional placement (QIP) at a time when the risk appetite for Indian stocks had risen considerably. But the large investors who bought shares in the issue are now sitting on a loss of almost 50%. 

As far as the company goes, it may have got the funds, but from an investor relations’ perspective, the QIP issuance has turned out to be a regrettable chapter. During the time of the issue, it had seemed that R-Com would backup the fund-raising with sale of non-core assets. A report in The Economic Times had said in June 2014 that the company plans to sell its international business, Global Cloud Xchange, in the next three-four months, its direct-to-home television business in six months and its real estate holdings over a two-three year period. 

But about eight months later, there is no visibility on any of this. Monetization of the company’s non-core assets continues to look like a distant dream. 

Besides, as R-Com’s quarterly results statements have shown, there’s hardly anything in its operational performance to get excited about. In the December quarter, revenues and Ebitda (earnings before interest, taxes, depreciation and amortization) rose by 1.2% and 0.3%, respectively. In the nine months till December, Ebitda fell by 5.7%, while revenues were more or less flat. Meanwhile, competitors Bharti Airtel Ltd and Idea Cellular Ltd have been reporting strong growth in profit in the past few quarters. 

In addition, R-Com faces the greatest risk from the impending entry of Reliance Jio Infocomm Ltd. Analysts say that one of R-Com’s thriving businesses is data cards (also known as dongles), which can immediately come under pressure from Reliance Jio’s data-centric offerings. 

According to an analyst with a domestic institutional brokerage firm, in the forthcoming auctions, the company also faces the risk of not being able to get renewal spectrum to continue services in some key circles. The reason for this is that the spectrum on offer is limited, and larger companies such as Bharti Airtel, Idea Cellular and Vodafone India Ltd may well use their financial muscle to buy better quality 900 megahertz spectrum, even in circles where they aren’t compelled to bid. 

R-Com, on the other hand, is laden with debt and doesn’t have the luxury of some of its competitors while bidding in the auctions. After the QIP issue, net debt has reduced from around Rs.40,000 crore to Rs.36,767 crore. 

A silver lining is that the company is generating cash flow from its core operations. However, it has no option but to quickly monetize non-core assets and reduce debt. The longer it takes to do this, the more it will distance investors. 

The writer doesn’t own shares in the above-mentioned companies.

Courtesy: Live Mint